Day: 2012/11/20

Some LSAT Tea-Leaf Reading & Some Student Debt Stuff in The News

A while back I expressed dismay at the lower-than-expected drop in LSATs in June 2012. The October numbers are in, and the decline renews! Sometimes I like being proven wrong. Obviously, LSATs aren’t the same as applicants, but: no LSATs, no applicants. We also have no idea how many people are first-time takers vs. repeaters. In recent years, it’s been a steadily declining percentage due to increased incentives to retake the test, so it ought to be less than two-thirds for October takers, say 24,000 maybe.

I still see snippets here and there of how this is “the market correcting itself,” as though scambloggers are merely deterministic market outcomes and not rebukes of market failure. Indeed, even if there were half as many applicants as in 2012 (67,957), it would still be too many—but a welcome result. When exactly is the market going to correct for all those unemployed 2012 grads?


In other news, the New America Foundation is continuing its war against those high-earning student debtors who dump their loans on Income-Based Repayment and screw over the taxpayer. “Subsidized Stafford Loans Obsolete and Regressive Due to New Income Based Repayment.”

If lawmakers end the Subsidized Stafford interest benefit for undergraduates to provide more funding for Pell Grants—and they should—expect student and borrower advocates to again argue that the changes will increase student debt burdens. Except this time, the critics will have to include a big caveat that will undermine their case.

Subsidized Stafford loans now provide regressive benefits. That is, they target benefits to borrowers earning higher incomes in repayment. That is due to the new Income-Based Repayment (IBR) plan for federal student loans that took effect this month.

There’s another lesson in here, too. Federal student aid is an incoherent mix of complex benefits and rules that overlap and cancel each other out in ways that virtually no one understands. For that we may thank the lawmakers (and the advocates who encourage them) who have added to, tweaked, and changed eligibility rules for these programs time and time again without even a hint of a broad plan. It’s time for a wholesale redesign of federal student aid.

Instead of a “wholesale redesign,” why not terminate the Direct Loan Program and restore the bankruptcy protections? It’s not like everyone needs a college degree.


Speaking of which, I think those interested in student debt issues should take a gander at The Debt Resistors’ Operations Manual (PDF), written by “an anonymous collective of resistors, defaulters and allies from Strike Debt and Occupy Wall Street.” I’m ambivalent about anonymously led movements. On the one hand, yes, these people (might) have jobs and can be terminated by disapproving, conformist employers. On the other, it’s hard to take faceless, leaderless, heroless organizations seriously. “The Occupy Number Undetermined” doesn’t sound as bold as “The Chicago Seven,” and I’d hate for the FBI to know more about these people than their own constituents do.

Some of what the Operations Manual says about student debt is good; much I disagree with. I won’t repeat much of the good stuff, so don’t think I’m as critical as I sound.

Neoliberal policy-making has transferred the financial burden [of higher education] onto individual students. This means your future salary will be used to pay back the debts you got stuck with to prepare yourself for employability in the first place. Having to pay for education through debt is a form of indenture. And unlike traditional forms of indenture, it can take a lifetime to regain your freedom.

Bitterness towards student loans is amply justified, but this passage captures my primary criticism of the Operations Manual: ALL DEBT IS EVIL! Well, no. It’s not. Capitalism is good; financialism isn’t. Debt itself isn’t evil anymore than inflation, the military, or clean water are. Likewise, borrowing money to buy knowledge you can’t really get efficiently off the Internet to work at a job that pays better than what you’d get out of high school is fine if it works.

After some Sallie Mae bashing (which is understandable):

But don’t be fooled, these “federal” loans are still serviced by a group of select private institutions, including Sallie Mae. In addition, federal loans have unjustifiably high rates of interest (6.8%). Is the government profiting? Yes, and the proceeds are used to pay the bill for wars and Wall Street bailouts.

The servicers get a lot less under the Direct Loan Program than they used to under the FFELP, but the government’s sin is as much failing to underwrite its loans as setting interest rates. Although, I think the Operations Manual could come down harder on the last line: The Direct Loans Programs’ stated purpose is paying for the Affordable Care Act (not TARP & drones), but ultimately it represents an ideology of a government that prefers moving money onto the books via secret taxes because it can’t conduct a sincere discussion of fiscal policy.

It won’t end well. Secret taxes mean secret opportunity costs hidden from GDP calculations due to government malinvestments in unneeded educations and people mailing 10 percent of their paltry discretionary incomes to the government instead of buying and investing in stuff. Rambling back a little, this is the problem I have with the New America Foundation: It says we need to stop tweaking with loan programs (mere weeks after publishing a 50-page policy paper advocating tweaking with IBR), but it’s uninterested in the enormous losses on student loans that the government faces in the coming years. Unfortunately, the anonymous collective isn’t interested in this dimension either, which, again, is understandable given its goals, but it might persuade more people that reform is necessary by broadening its perspective beyond alienation over debt.

As to which reforms it advocates, I’m not so enamored with the Operations Manual‘s suggestions of linking up with Student Loan Justice, Forgive Student Loan Debt to Stimulate the Economy, or the Occupy Student Debt Campaign (OSDC). Okay, I’m fine with Student Loan Justice, but I find Forgive Student Loan Debt to Stimulate the Economy’s claims unsubstantiated. It’s hard to believe that student loan cancelation would stimulate the economy when the bulk of it is owed by only 40 million or so people, can be IBRed (but if you make a lot of money, the New America Foundation has you in its sights), and can be serviceable with a normal level of jobs and moderate wage inflation. Obviously someone would have to pay for the write-down, but if the Fed can print $40 billion a month indefinitely for QE3 without any adverse consequences, I’m sure it can buy student loan debts and shred them. Whether it will lead to a consumer buying binge is less likely.

The OSDC’s claims, by contrast, are straight-up liberal interventionism.

OSDC believes that our public education system must be free, that any future student loans must be offered at zero interest, that all university in­stitutions must be transparent and accountable, and that all current student debt must be cancelled. These principles, or principles like them, should be the foundation of any student debt movement.

Who’s going to pay for all this free higher ed.? Sales taxes on the poor? Higher income taxes for the rich? How is it going to create jobs for graduates? What’s going to stop public universities from spending even more money? Bear in mind public university salary information is often a matter of public record, and no one seems to care that many public employees are hauling home six-figure incomes as professors. This problem won’t go away so long as high school graduates have no employment alternative to college, but the OSDC doesn’t realize that the student debt crisis masks the job polarization crisis. Even with no student loans, we still have significant long-term problems.

Although the remainder of the Operations Manual focuses on the other types of debts Americans are likely to encounter (and to its credit it discusses municipal debt, typically though, without pointing out that that taxing land rents is the most stable way for cities to raise revenue and promote growth), the one debt the it doesn’t discuss directly is the trade debt, outside a quote from Debt: The First 5,000 Years. We import more than we export, and in order to do this the public sector, the private sector, or both must borrow capital. Much of this is energy imports so people can drive to work and cause global warming. A lot of our short-term economic problems, including our personal debt woes, would be solved if we were serious about reversing the current account deficit, which is somewhere around three percent of GDP dubiously thanks to the housing bust. There was some discussion of that leading up to the presidential election last month, but it was mainly China bashing. Too bad Occupy the National Income and Product Accounts doesn’t motivate people the way offers of free lecture courses does.